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Friday, May 14, 2021

Explained: Amid Trump-Fed chairman tension, a look at govt-RBI relations in India

United States President Donald Trump has recently said he can remove or demote the chairman of the Federal Reserve, Jerome H Powell.

By: Explained Desk | New Delhi |
Updated: March 18, 2020 2:55:28 pm
Donald Trump, Jerome H Powell, US Federal Reserve, trump says will fire Powell, RBI, history of RBI government relations, express explained, indian express Donald Trump said he has the right to sack Jerome Powell or take away his powers, even though he did not intend to do that immediately. (Photo: AP)

United States President Donald Trump on Saturday (March 14) threatened to remove or demote the chairman of the Federal Reserve, Jerome H Powell.

“I am not happy with the Fed because I think they’re following not leading, and we should be leading,” Trump told reporters at a news conference on the administration’s response to the coronavirus outbreak.

Trump said he has the right to sack Powell or take away his powers, even though he did not intend to do that immediately.

“I have the right to remove him. No, I’m not doing that,” he said. “I also have the right to put him in a regular position and put someone else in charge, and I haven’t made any decisions on that.”

Why is Donald Trump angry with Jerome Powell?

The President has been repeatedly attacking the Fed and its chairman Powell in public, and reports that he is considering ways to get Powell out of the way have appeared for almost a year now.

Trump’s basic frustration is that the central bank, whose mandate is to keep the US economy in good health over the long term, has not been as aggressive in easing the monetary policy stance as he would like it to.

The President believes that lowering interest rates could help stimulate the US economy in the coming months, before national polls in November this year when he is trying for reelection.

Can Trump remove Powell?

Unlike most senior US government officials, Fed governors cannot be fired at the President’s will. According to the law, once they are confirmed by the US Senate and appointed by the President, they can only be let go “for cause”, such as personal misconduct.

According to an expert who spoke to The New York Times, the US Congress could stop arbitrary removal by enacting legislation adjusting the text of the Federal Reserve law, so that it would clearly and explicitly protect the chair from being removed without good cause.

Friction between governments and the central bank

A central bank, like the Federal Reserve in the United States and the Reserve Bank in India, is supposed to make decisions based on economic data, keeping in mind the long term interests of the country.

Unlike politicians, whose actions could be influenced by factors such as prospects of re-election, a central bank is supposed to work as a guardian of the economy.

When the central bank takes a decision to keep interest rates high, less money flows in the economy, leading to fewer investments and job opportunities being created. Despite such decisions being good for the future, they can be unpopular in the short term, leading to resistance from politicians who run the government.

Similar tensions in India

Conflicts between the central government and the RBI have occurred time and again. The tenures of RBI Governors have been impacted by such clashes and during political changes.

The longest-serving RBI Governor after Independence, Benegal Rama Rau (1949-57), was forced to quit after a confrontation with then Finance Minister T T Krishnamachari. Prime Minister Jawaharlal Nehru backed his cabinet colleague, and wrote to Rau: “Obviously [the Bank] also has a high status and responsibility. It has to advise the government, but it also has to keep in line with the government.”

K R Puri, who was appointed by Indira Gandhi’s government a couple of months into the Emergency, had to leave in May 1977 after the Janata Party came to power.

R N Malhotra, who became Governor in 1985, got an extension after his term ended; however, he had to leave in 1990 after Chandra Shekhar became PM.

Dr Manmohan Singh, who was RBI Governor between 1982 and 1985, provided an insight into negotiations with the government in a conversation that his daughter Daman Singh reproduced in her book, Strictly Personal: Manmohan and Gursharan (2014). “There is always give-and-take. I had to take the government into confidence. The Governor of RBI is not superior to the Finance Minister in authority. And if the Finance Minister insists, I don’t see that the Governor can really refuse unless he is willing to give up his job.”

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